Jim Woods

Learning Options Lingo: Contingent Orders

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Puts, calls, spreads, straddles -- when it comes to options trading, there's a lot of lingo to learn. But once you get the basics down, well, that's when the real fun begins.

We've already covered many of the basic types of orders associated with options trading, but now it's time to get a little deeper into one type unique to options, the contingency order.

When you place an options order, you can choose to place contingencies on that order, meaning that the order will be filled only when a specific event has occurred.

A contingent order is simply a way to enter an order to buy an option, but instead of specifying the option price you want, you specify where you want the stock to trade at before your option order is entered. With a contingent order, you peg your option buys and sells to where the stock or index is trading.

Here's an example. You are interested in buying call options on XYZ Corp. The stock has been in an uptrend, however it recently had some profit taking and is currently trading at $47 per share. You decide on three-month-out call options at the $45 strike price.

You could enter a contingent order to buy these XYZ 45 Calls when the stock hits $45, $46 or $48, or whatever price you choose. The point is, with a contingent order, you simply specify when you want to buy your options based on the price of the stock, not the price of the options.

Two Flavors for Your Orders -- O.C.O. and O.T.O.

For most of the time that options have been available to trade, contingent orders have not been available to the individual investor. However, with the speed and convenience of the Internet, contingent orders are now available at most option brokerage firms.

Let's take a closer look at some of the most popular contingent orders.